Going Private But Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-Private Decisions

Robert P. Bartlett

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Corporate Finance and Governance Auditing, Earnings Management, Governance Private Equity and Venture Capital

Abstract

This Article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment.Prior studies of this issue generally suffer from a mistaken assumption that by goingprivate, a publicly traded firm necessarily immunizes itself from SOX.In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC reporting obligations and, as a consequence, most of the substantive provisions of SOX.This Article thus explores a previously unexamined natural experiment: to the extent SOX contributed to the rise in goingprivate transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of"SOX-free"finance.Using a unique dataset of going-private transactions, this Article examines the financing decisions of 468 going-private transactions occurring in the eight-year period surrounding the enactment of SOX.Although SOX-free forms of subordinated debtfinancing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt financing in structuring going-private transactions after SOX was enacted.Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small-and medium-sized transactions, while significantly increasing for large-sized transactions.These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms.They also strongly suggest that non-SOX factors were the primary impetus for the "name brand" buyouts commonly evoked as evidence that SOX has harmed the competitiveness of US capital markets.

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References

1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 2006The Sarbanes–Oxley Act and firms’ going-private decisions 1997Corporate Finance, Theory and Practice.2007The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US 2007Was the Sarbanes–Oxley Act of 2002 really this costly? A discussion of evidence from event returns and going-private decisions 2002Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002 2007Why Do Firms Go Dark?2005The Costs of Being Public after Sarbanes-Oxley: The Irony of 'Going Private'

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2012The size, concentration and evolution of corporate R&D spending in U.S. firms from 1976 to 2010: Evidence and implications 2013SOX after Ten Years: A Multidisciplinary Review 2019The Debt-Equity Choice When Regulatory Thresholds are Based on Equity Values: Evidence from SOX 404 2017The determinants of buyout returns: Does transaction strategy matter?

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